Jan. 10, 2012 _ The state’s fiscal challenges continue to loom large despite a significant income tax increase and spending cap implemented almost a year ago. During the first week of January, Governor Quinn’s Office of Management and Budget issued budget projection reports that take a look at the state’s fiscal trajectory over the next three years. (See: Three Year Budget Projection (General Funds), FY13-FY15 and Illinois’ Economic and Fiscal Policy Report (HB 6268/Public Act 96-1354). Both can be found at http://www.state.il.us/budget/.)

IGPA expert Dr. Richard Dye, co-director of The Fiscal Futures Project, provided the following analysis. His analysis does not necessarily reflect the views of the University of Illinois. He provides nonpartisan, research based context for this complicated issue.

As simplistic as a single page budget projection is, it is great news for the state to finally see some budget planning that is more than a single year ahead. Illinois’ budget crisis has been decades in the making and it will take many more years to get the situation under control.

However, the 3-year budget projections include only the state’s four General Funds, which is only about half of the total state budget. The Fiscal Futures Project has found that a much more meaningful fiscal picture can be seen in a Consolidated Funds Budget that also includes the state’s special funds (learn more here). Without consolidation, transfers between funds can obscure the true budget situation. If major budget items are shifted into and out of the General Funds from one year to the next, the 3-year projections are not as meaningful.

Yet taken for what they are, the governor's 3-year revenue projections seem plausible and responsible. The inclusion of FY 2015 highlights the impact of the expiration at the end of calendar year 2014 of most of the temporary income tax increases imposed one year ago. Only half of the calendar 2015 tax reduction occurs in fiscal 2015, so including one more fiscal year would show even greater decline.

On the General Funds expenditure side, the 3-year projections show scheduled increases in pension contribution and debt service payments. Other expenditure categories show identical amounts for FY 2013, 2014 and 2015 with all of the changes—if any—occurring between FY 2012 and FY 2013. Thus the spending-side budget can be seen as a broad-brush precursor to Governor Quinn’s detailed budget proposals for FY 2013, which will be announced next month.

There are four policy proposals or priorities signaled in these numbers:

1. Governor Quinn assigns priority to education by maintaining FY 2012 spending levels for the next three years, while most everything else is being cut.

2. Health care spending is also held constant from FY 2012 to FY2013 to FY 2015. Since medical costs are expected to continue to rise each year, freezing medical spending will only be possible with "material reductions" in program eligibility or reimbursement rates. Restraining health care spending growth to zero for four years will represent an enormous policy challenge.

3. The budget line for “statutory transfers out” falls slightly from FY 2012 to FY 2013 and then stays constant to FY 2015. Since most of this is payment to the “local government distributive fund,” this will require statutory changes to the current formulas for sharing state income and sales tax revenues with local governments.

4. There are substantial cuts in the rest of the budget in FY 2013--on the order of six to nine percent overall--and spending is to be frozen at that level through FY 2015. Such cuts are huge and indicate that Governor Quinn's administration realizes the magnitude of the state budget crisis.